Business Interests and Their Treatment in the Event of a Breakup

In 2023, Scotland saw the establishment of more than 40,000 new enterprises. However, what are the family law implications for spouses, civil partners, and cohabitees when it comes to business interests?

In Scotland, the net value of matrimonial or partnership property should be equitably distributed between the parties in the event of a divorce, separation, or dissolution of a civil partnership. Fairly implies that all individuals are treated equally unless there are exceptional circumstances that warrant unequal distribution. The marital or partnership property refers to all the property that belonged to the parties, either jointly or as individuals, on the date of their cessation of cohabitation, provided that it was acquired during the marriage or civil partnership (other than through gift or succession).

Consequently, your interest in the business would not be considered matrimonial or partnership property and would not be subject to equitable sharing if you established your business as a sole trader, private company, or partnership before your marriage or civil partnership. The same principle would apply to the interest of your spouse or civil partner if you are in a business or partnership. Nevertheless, it may still be feasible to submit a financial claim for the value of a business interest that belongs to your spouse or civil partner if your spouse or civil partner has benefited economically from your contributions and/or you have experienced an economic disadvantage in the business’s favour.

As a result, if you establish a business during your marriage or civil partnership, your business interest will be considered matrimonial or partnership property, unless it was gifted to you or inherited by you.

Business Owners

Business owners and their professional advisors (including lawyers, accountants, and financial advisors) must exercise caution in situations where the business structure changes (e.g., a sole trader becomes a limited company) or when one of the spouses or civil partners acquires an interest in the other spouse or civil partner’s business during the marriage or civil partnership. This is a common pitfall. We, as family attorneys, comprehend that these business decisions are frequently driven by tax considerations. Nevertheless, this may be considered a conversion in the context of family law, which could lead to the conversion of non-matrimonial or partnership property into matrimonial or partnership property. This implies that the value of the business interest would be subject to the requirement for equitable sharing, which may necessitate the sale, transfer, or restructuring of business interests to satisfy the spouse or civil partner’s claim. This may result in unintended consequences in the event of the collapse of the marriage or civil partnership unless all potential legal implications are taken into account before altering the business structure. The legal position is not always unambiguous and may necessitate litigation.

Additionally, the legal status may pose an issue for cohabiting couples. If a couple elects to cohabitate rather than marry or enter into a civil partnership, the initial assumption is that each party will retain their assets and debts upon separation. This encompasses commercial interests. Consequently, if one cohabitee acquires an interest in the business of the other cohabitee, they will be entitled to retain that interest upon separation. Currently, family law does not provide a mechanism for one cohabitee to request the transfer of the other cohabitee’s business interest, except through agreement. The transferor would be entitled to receive the value of the interest in exchange, even if both parties are in accord. This may not have been the intention when the interest was acquired.

Good News

The good news is that it is feasible to prevent the undesirable repercussions of a relationship dissolution by obtaining comprehensive family law advice before making a business decision. The preparation of a Pre- or Post Nuptial Agreement or Cohabitation Agreement, often in conjunction with an amendment to an existing Partnership Agreement, Shareholders’ Agreement, or other company documents, can provide clarity and certainty during a difficult time by regulating how the business interest will be treated in the event of separation, divorce, or dissolution.